Following a year in which the S&P/TSX composite index was once again a top performer globally, does it make sense to look outside Canada for growth — even if the limits on foreign content in RRSPs has been removed? Shouldn’t investors keep their money at home in Canadian equity funds, particularly funds with little or no money outside the country?

One well-regarded Canadian equity fund with a penchant for Canadian holdings is the $1.1-billion PH&N Canadian Equity Fund offered by Vancouver-based Phillips Hager & North Investment Management Ltd. It dropped 12.7% in 2002, but just about every other fund was down a similar amount that year. It subsequently jumped sharply, delivering a strong gain of 25.5% in 2003, vs a rise of 26.7% for the S&P/TSX index. In 2004, the fund was up 17.5%, vs a 14.5% return for the index. Year-to-date as of Feb.
28, it is up 3.6%.

Another smaller, stay-at-home offering is the $331-million Beutel Goodman Canadian Equity Fund offered by Toronto-based Beutel Goodman Managed Funds Inc., It struggled a bit in the late 1990s but improved more recently relative to its peer group. Matching the index, the fund lost 12.7% in 2002, then jumped 26.8% in 2003, before rising 13.0% last year. It’s up 2.5% so far in 2005.

The two funds earn four-star ratings from Morningstar Canada, suggesting that both have been above-average performers over the past five years.

Dale Harrison is head of the Canadian equities team at PH&N. Each team member is responsible for picking stocks in his area of expertise for all the firm’s domestic equity funds. Harrison joined PH&N in 1998 from BMO Nesbitt Burns Inc., where he worked as a portfolio manager and, prior to that, as a financial services analyst.

Andrew Sweeney joined Beutel Goodman in 1999. He is responsible for research in the areas of telecom, technology, cable and broadcasting, and real estate. Prior to joining Beutel, he worked as an analyst at HSBC Asset Management (Canada) Ltd.

Harrison uses a bottom-up, growth-at-a-reasonable price investment style, looking for stocks that exhibit sustainable long-term secular growth and profitability. As a rule, he prefers mature, growing companies with strong free cash flow and good management, and is willing to hold as much as 10% of the fund in any single name.

Sweeney and the other members of the Beutel Goodman team use a bottom-up value approach to stock selection, focusing on free cash flow. The style is largely determined by the company’s pension clients which don’t like to see managers overpay for anything.

He calculates a business value for each stock two to three years down the road, then buys those issues that trade at a discount and that might produce a 50% return, including dividends. He generally sells a significant part of the holding when a stock reaches that target.

Recently, neither fund held much cash, nor do they have substantial holdings in income trusts. To remain fully invested, Harrison occasionally holds exchange-traded funds instead of cash.

In Sweeney’s case, the fund’s top 15
holdings account for 56% of the fund’s assets while, in Harrison’s case, they represent 68%. The Beutel Goodman fund seldom holds more than 80 positions, whereas PH&N Canadian Equity tracks nearly 100. Both funds can be described as low-turnover options.

Both funds favour larger-cap stocks, although Harrison recently added a number of small-cap names to capture emerging growth. This component represents only a small percentage of the fund, however, and the Beutel Goodman fund actually has a lower overall average market cap. It also produces a higher dividend yield.

Both funds have blended value and growth investment styles, Morningstar reports, the measures of which are largely in line with the S&P/TSX index. The two funds also have many large holdings in common; Manulife Financial Corp., for instance, is the largest company in both funds.

Overall, the PH&N fund has a greater bias toward companies that will benefit from a stronger economy. At time of writing, Harrison was tilted heavily toward financial services with holdings in most of the major banks. Other larger holdings include Encana Corp. and Suncor Energy Inc.

The Beutel Goodman offering is lighter in financials and information technology, with a greater tilt toward energy and an above-market weighting in utilities.
Sweeney’s major holdings include most of the major banks as well as Molson Inc.,
BCE Inc. and Talisman Energy Inc.